Management's Discussion and Analysis of Financial ... - Wal-Mart

Notes to Consolidated Financial StatementsThe deferred taxes noted above are classified as follows in theaccompanying Consolidated Balance Sheets:January 31,(Amounts in millions) 2011 2010Balance Sheet Classification:Assets:Prepaid expenses and other $1,636 $1,534Other assets and deferred charges 327 331Asset subtotals 1,963 1,865Liabilities:Accrued liabilities 17 34Deferred income taxes and other 3,641 2,722Liability subtotals 3,658 2,756Net deferred tax liabilities $1,695 $ 891Unremitted EarningsUnited States income taxes have not been provided on accumulatedbut undistributed earnings of the Company’s international subsidiaries ofapproximately $17.0 billion and $13.7 billion as of January 31, 2011 and2010, respectively, as the Company intends to permanently reinvest theseamounts outside of the United States. However, if any portion were to bedistributed, the related U.S. tax liability may be reduced by foreignincome taxes paid on those earnings. Determination of the unrecognizeddeferred tax liability related to these undistributed earnings is not practicablebecause of the complexities with its hypothetical calculation.Net Operating Losses, Tax Credit Carryforwardsand Valuation AllowancesAt January 31, 2011, the Company had U.S. capital loss carryforwardsof $776 million and international net operating loss and capital losscarryforwards totaling approximately $4.1 billion. The U.S. capital losscarryforward will expire, if not utilized, in 2012. Of the internationalcarryforwards, approximately $2.3 billion will expire, if not utilized,in various years through 2021. The remaining international carryforwardshave no expiration. At January 31, 2011, the Company had foreign taxcredit carryforwards of $1.3 billion, which will expire in various yearsthrough 2021 if not utilized.As of January 31, 2011, the Company has provided a valuation allowanceof approximately $2.9 billion on deferred tax assets associated primarilywith net operating loss and capital loss carryforwards for which managementhas determined it is more likely than not that the deferred tax assetwill not be realized. The $732 million net change in the valuation allowanceduring fiscal 2011 related to releases arising from the use of netoperating loss carryforwards, increases in capital loss carryforwards,international net operating losses arising in fiscal 2011 and fluctuationsin currency exchange rates. Management believes that it is more likelythan not that the remaining deferred tax assets will be fully realized.Uncertain Tax PositionsThe benefits of uncertain tax positions are recorded in our financialstatements only after determining a more-likely-than-not probabilitythat the uncertain tax positions will withstand challenge, if any, fromtaxing authorities.As of January 31, 2011 and 2010, the amount of unrecognized tax benefitsrelated to continuing operations was $795 million and $1.0 billion, respectively,of which, the amount of unrecognized tax benefits that would affectthe Company’s effective tax rate is $687 million and $671 million for January31, 2011 and 2010, respectively.A reconciliation of unrecognized tax benefits from continuing operationsis as follows:Fiscal Years Ended January 31,(Amounts in millions) 2011 2010 2009Unrecognized tax benefit,beginning of year $1,019 $1,017 $ 868Increases related to prior yeartax positions 101 129 296Decreases related to prior yeartax positions (61) (33) (34)Increases related to current yeartax positions 199 246 129Settlements during the period (453) (340) (238)Lapse in statutes of limitations (10) — (4)Unrecognized tax benefit,end of year $ 795 $1,019 $1,017The Company classifies interest and penalties related to uncertain taxbenefits as interest expense and as operating, selling, general andadministrative expenses, respectively. During fiscal 2011, 2010 and 2009,the Company recognized interest related to uncertain tax positions of$45 million, $88 million and $109 million, respectively. At January 31, 2011and 2010, the Company had accrued interest related to uncertain taxpositions of $205 million and $231 million, respectively, and $2 millionof accrued penalties. There were no changes to accrued penaltiesrecognized during the year.During the next twelve months, it is reasonably possible that taxaudit resolutions could reduce unrecognized tax benefits by between$330 million and $420 million, either because the tax positions are sustainedon audit or because the Company agrees to their disallowance.The Company does not expect any change to have a significant impacton our consolidated financial statements.The Company is subject to income tax examinations for its U.S. federalincome taxes generally for the fiscal years 2009 through 2011. TheCompany is also subject to income tax examinations for internationalincome taxes for the tax years 2003 through 2010, and for state and localincome taxes for the fiscal years generally 2006 through 2009.Discontinued OperationsAt January 31, 2010, the Company had an unrecognized tax benefit of$1.7 billion related to an ordinary worthless stock deduction from the fiscal2007 disposition of its German operations. During the fourth quarter of fiscal2011, this matter was effectively settled with the Internal Revenue Service,which resulted in the reclassification of the deduction as an ordinary loss,a capital loss that the Company has fully offset with a valuation allowance,and a reduction in the accumulated but undistributed earnings of an internationalsubsidiary. In connection with this settlement, the Company recordeda $1.0 billion tax benefit in discontinued operations on our ConsolidatedStatements of Income (see Note 15) and a reduction of our accrued incometax liability in our Consolidated Balance Sheet at January 31, 2011.Walmart 2011 Annual Report 45